Kill two economic policy birds with one stone: more generous, funded transfer payments

Many are fretting, in the face of Brexit and Trump and Le Pen and AFD and Five-Star that economies are doing too little to combat inequality.

At the same time, with global real rates set to be low for the foreseeable future, economies are going to live closer to the zero bound in future, and in the shadow of business and financial cycles that we now realise can be larger than we thought before 2008.

So how about raising effective tax rates and spending them on more generous transfer payments through the social security/insurance system?

This helps inequality, [redistributing from those earning enough to pay taxes to those who are not] and it amplifies the automatic stabilisers, helping out monetary policy at the zero bound in the event of a recession.  The amplification of the stabilisers means that when a recession hits, tax revenues fall by more, the greater the effective tax rate to start with;  and transfer payments rise by more, the greater the replacement ratio used to start with.

Steady-state inequality is eased in two ways.

First, even at its resting point, capitalist economies will separate people from jobs and from the labour force, sometimes permanently. Higher taxes and transfers benefit those thus dumped on the scrapheap.

Second, recessions tend to hit those at the bottom disproportionately.  The automatic stabiliser amplification gives those who lose their incomes more when they do, but the recession itself will tend to be smoothed somewhat, so the income loss for those at the bottom will be less to begin with.  Averaging over many decades, this tendency to provide more income to the jobless, and reduce joblessness in recessions, will help inequality.

 

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4 Responses to Kill two economic policy birds with one stone: more generous, funded transfer payments

  1. Jonathan says:

    Interesting point. But people worry about inequality in the steady state (which implies you need transfers all the time) but you are talking about cyclically dependent transfers. “Solving” inequality with permanent transfers would presumably lessen liquidity constraints and remove the bite of automatic stabilisers as you invisage: automatic stabilisers only work if we remain sufficiently unequal!

    (as an aside: I don’t think there’s much evidence that inequality drove Brexit/Trump rather than say, cultural concerns over immigration. There are many on the left who care about inequality anyway, and are seizing on the political mood to push this (and to avoid answering difficult questions about cultural change) but people say they care about immigration, not inequality. I mean, the US just elected a man who lives in a gold penthouse as their President).

    • Tony Yates says:

      Thanks for your comments, which make good points. I think this proposal will help steady state inequality. I rewrote the post to explain why. Your points about what brought about Trump are part of a fair debate. I’d argue it was a contributing factor. A few commentators have noted that there was a minority group of white working class who were prepared to overlook Trump’s own elite status and thought that he would look after their interests. I am sure as you hint that they will turn out to have been wrong.

  2. mrkemail2 says:

    You are right Tony, auto-stabilisation requires *no* human intervention whatsoever. You decide the policy rate and it is completely free running and self-balancing. It is direct, immediate – and best of all it works a treat.

    What is your view on this:
    http://www.enlightenmenteconomics.com/blog/index.php/2016/08/markets-and-humans/#comment-550687

    The JG is the buffer stock. It replaces unemployment with employment. It replaces £70 per week + nothing with £375 per week + output in a ideally distributed manner that prevents the complete collapse of demand in regional areas. It provides a permanent alternative bid for every labour resource in the market at a fixed price. It is the ultimate equal wage employer.

  3. mrkemail2 says:

    Tony, reply please!

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